HSBC decided to make 35,000 of its employees redundant. The job cuts are part of the bank’s restructuring programme. But will it benefit the shareholders?
Job cuts at HSBC
The news came last week from the BBC and was confirmed by the bank. Surprisingly, the redundancies were not due to the Covid-19 crisis that badly affected the financial industry. The plan had been announced in February but was only executed last week.
HSBC has been struggling since the great recession. All of its CEOs tried their best to increase the bank’s efficiency. Generally speaking, I agree with my colleague, Karl Loomes, that restructurings are often essential to make companies leaner and fitter. The necessity of doing so is much greater during hard times such as those that we are clearly experiencing right now.
HSBC is trying to reduce its presence in the US and Europe. Even though day-to-day business costs are quite high in these offices, the profits and revenues are quite low. The bank has always relied on Asia and most importantly China and Hong Kong for its profit generation. In fact 90% of the bank’s profits and 50% of revenues are from Asia. So, it is important for the bank to focus on this region. However, the recent changes are not limited to this. The bank also decided to merge its retail banking and private banking divisions with its underperforming investment department. All these measures were taken to minimise HSBC’s costs.
HSBC’s earnings and other financials
The costs have declined in the first quarter of 2020 even without all these measures but the decline hasn’t been substantial at all. The adjusted costs only decreased by 3% compared to the first quarter of 2019, whereas the profit before tax fell by 51% compared to the same period a year ago. So, it looks like the bank needs this restructuring since the worst is probably still to come.
HSBC estimates that it will have a record number of bad loans. So, the bank has increased its liquidity. In order to do so, HSBC was forced to cancel its dividends this year. It was a prudent decision, indeed. The net earnings per share for the first quarter only amounted to $0.09 per share. It is much worse than the result of $0.21 per share for the same period a year ago. But at the same time the results were much better than they had been in the fourth quarter of 2019, despite the Covid-19 crisis and the oil price collapse. The positive change was mainly due to increased lending and investment revenue in Asia.
Although the recent results and the Covid-19 crisis might not make many investors very optimistic, HSBC’s financial health is quite strong. Its CET-1 ratio (the higher it is, the less the bank is exposed to high-risk assets) is 14.6%. This is great since many large healthy banks have a ratio of about 12%.
Is HSBC’s stock worth buying?
Income investors should be prepared that HSBC will not pay a dividend for a while. Due to the crisis and the growing number of bad loans, HSBC’s earnings will be under pressure. However, the restructuring and the certainty that ‘this too shall pass’ might make HSBC a good choice for patient investors.
But there are other companies that are more worthy of your attention, in my view.
